One of the most annoying parts of running a business is having to hand over a large chunk of your profits to HMRC. Of course, this is a fact of life, and taxation is one area of running a business you really must understand.
Depending on whether you are operating as a sole trader or a limited company, and whether or not you have any employees, your tax and National Insurance liabilities will vary, as will any allowances you can claim to offset against tax.
Business taxation is a complex area, and we strongly recommend you speak with an accountant before starting up in business. Your accountant will be able to explain the various tax implications of working via the different trading structures; sole trader, limited company, partnership and LLP.
The most important tip we can provide in this area is – make sure you keep on top of your paperwork. Get organised from day one, and don’t pay your taxes late!
Limited companies pay Corporation Tax on any business profits. The amount of tax payable is determined at the end of the company’s financial year. You will have nine months from the end of the financial year to pay your corporation tax bill to HMRC.
Up until April 2015, there were two different rates of corporation tax; the “main rate” and “the small profits’ tax rate”. Smaller companies are taxed at the small profits’ tax rate, which is levied on the first £300,000 of limited company profits. The small profits’ tax rate is currently 20%.
In the recent past, the small profits’ tax rate was a little lower than the main rate. However, in April 2015 the main rate for corporation tax was cut from 21% to 20%, meaning that all UK-registered companies, irrespective of size, now pay corporation tax at 20% of company profits.
If you are a limited company director, or have employees, you will also need to know about the Pay As You Earn (PAYE) scheme. The scheme ensures that tax is deducted from employee’s pay each week or month rather than through the self assessment tax return which applies to sole traders and partnerships.
One tax which varies significantly according to your business structure is National Insurance Contributions (NICs). As an employer, you will be liable to pay employers’ National Insurance contributions.
Self-employed people, that is those operating as sole traders and partnerships, pay Class 2 and Class 4 National Insurance Contributions (NICs), whereas limited company directors pay Class 1 contributions on their salaries above a certain threshold.
Levels of taxation, and thresholds change on a regular basis. The intricacies of the business tax system is not something you should be wrestling with when you are starting a business. Hire a good accountant as soon as you start up in business and let them take care of this side for you.
Don’t forget that ignorance of tax law is never accepted as an excuse for late, or non-payment of your tax liabilities.
Value Added Tax (VAT)
Value Added Tax (VAT) is added to the price of goods and services within the UK, and is collected at every stage of production and distribution.
The standard VAT rate is currently 20%, but there are other rates depending on what you sell. We will look at VAT in further detail in Part 7 of ByteStart’s Start-Up Guide
For more in-depth guides on the subject, visit our Accounting & Tax section.